Banks will be severely restricted in charging overdraft fees starting October next year, owing to a new ruling announced by the Consumer Financial Protection Bureau (CFPB) on Thursday.
The CFPB said the rule closed what it called an “outdated” legal loophole that exempted overdraft loans from lending laws, allowing the banks to charge the current fees.
“The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they’re charging on overdraft loans.”
According to consumer financial services company Bankrate, 27 percent of checking account holders pay overdraft fees every month, with fees averaging around $30—though they can run as high as $38.
Under the new rule, banks can charge either a fixed $5 fee for each overdraft, or a fee calculated from their average costs from the previous year for providing overdrafts.
As a third option, banks may continue to charge profit-generating overdraft fees, the difference being that the overdraft will be considered a loan, and as such needs to comply with standard lending laws (which includes disclosing applicable interest rates).
The rule will apply only to medium-sized and big financial institutions—banks and credit unions with more than $10 billion in assets—the CFPB said.
A few days prior to finalization of the rule, which was first announced in January, the Consumer Bankers Association (CBA) said in an open letter to the Senate Committee on Banking, Housing, and Urban Affairs that the overdraft rule “fails to appropriately consider how it could harm consumers,” and would leave them prone to increased fraud.
The CBA alleged that the CFPB relied on “decade-old data” to establish the “half-baked” rule.
“The bureau’s overdraft proposal has the potential to undo the years of progress banks have made by instead forcing all banks to offer their overdraft products at certain government-imposed prices.”
The CFPB did not immediately respond to a request for comment.
The CFPB is one of many independent regulatory agencies of the White House Competition Council, established in 2023 under President Joe Biden’s 2021 Executive Order on Promoting Competition in the American Economy.
According to government estimates, consumers pay $90 billion in junk fees annually.
According to the CFPB, government efforts have prompted banks to lower overdraft fees, saving consumers $6 billion in the process.
Banks have since reduced their overdraft fees by 40 percent or more, with Bank of America standing out with a 91 percent reduction from 2019 to 2023. By 2023, Capital One and Citibank had eliminated entirely fees on overdrafts and non-sufficient funds (NSF).
The CFPB said that the overdraft rule will take effect Oct. 1, 2025. It remains unclear if the incoming Trump administration will make any changes to the Biden-era regulatory efforts.
